Many people that are critical of active stock market operators and believe that winning traders and investors are more lucky than possessing of skill have not thought through what the long term winners have in common. The Trend Followers and Market Wizards profiled in best selling books are not simply due to survivor bias, they have a specific set of skills. The very long term traders and investors that survived for decades have one thing in common, they were risk managers, they did not blow up. The long term winning traders and investors had the skills to create great risk/reward ratios, limit their losses, be careful with position sizing, and control their risk. They were masters of making good decisions and managing their emotions and egos. The traders, investors, and hedge funds that blew up generally made the error of having ‘all in’ big bets that did not work out, letting an ego keep them on the wrong side of a trade, or went into a position without an exit strategy giving themselves unlimited risk. Those things set a trader or investor up to eventual demise with the first string of losses being their last. The long term winners in the stock market do not have those weaknesses.
Personally my risk exposure parameters is to only have a maximum of three trades on at any one time with each risking no more than 1% of total trading capital from entry to stop loss. I start with my stop loss based on where price has to go to prove I am wrong about an entry and set position sizing to be a 1% loss of total trading capital if my stop is hit. It is good to stage your trade entries in with steps so you always have capital on the sidelines if you are wrong and you need to exit or add to a winner. I rarely have more than 50% of my capital in positions. It is very rare for me to have more than 80% of capital in positions. When I am really aggressive it is usually with $SPY at the beginning of a new bull market breakout when I am very long with size. It is always good to limit risk exposure and to have dry powder on hand to make adjustments as price evolves. Never go all in with no room to adjust your positioning.
Stop losses show that you are open to the possibility of being wrong. No exit strategy after an entry shows arrogance. Trailing stop are the tools that allow you to let a winner run and be ready to lock in profits when the run is over. Good til’ cancelled stop orders are a good tool so you do not have to watch every tick all day and it will usually get you out of a trade and avoid any plunge in price as long as there is not a sudden gap. The down side is you can be stopped out during excessive intra-day noise and then price just turns around and reverses. GTC orders only execute during normal market hours and that is good because after hours can have low volume with wide bid/ask spreads and price can swing widely on lower volume in many pre-markets and after hours. The vast majority of the time after hours is just noise even after earnings releases the next morning can open very differently. I do not trade after normal market hours. I want to be with the higher volume for liquidity and price stability.
The ability to play a good defense with risk enables traders to make money over decades. It has been said that only 10% of active traders actually make money in the markets. What is not said is that what takes out the majority of new traders is not respecting risk. Generally it is emotions, ego, and ignorance that causes new traders to trade too big and too often. If you are going to make it to profitability you start with proper position sizing and stop losses but you are going to need the right mindset to do that. The biggest edge you can have is trading a systematic process that gives you great risk/reward ratios by managing your risk and leaving your upside profit open to maximum gain.